Default deniers: The new skeptics

They are the newest breed of government skeptics, the swelling ranks of Republicans who don’t believe the Obama administration when it says a failure to raise the debt limit will prove catastrophic.

And they stand ready to make negotiations over raising the cap on debt as grueling as possible, making Treasury officials and Wall Street more nervous than ever that the country could suffer an unprecedented default with consequences no one can predict.

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The suspicion, which once flourished on only the conservative outskirts of economic circles, has seeped into the mainstream in recent weeks, gaining broader acceptance among establishment Republicans, even as the administration issues increasingly dire warnings.

House Speaker John Boehner (R-Ohio) validated the default deniers Sunday, saying, “I understand the doubts.” Jim Nussle, a budget director under former President George W. Bush, argued last week that “no one’s going to default” if Congress misses the Aug. 2 deadline. And Alabama Sen. Jeff Sessions, the top Republican on the Budget Committee, accused the White House of scare tactics similar to those used by the previous administration to win quick approval of the 2008 bank bailout after the markets crashed.

“Congress was stampeded,” Sessions said of the bailout vote. “They will have a harder time stampeding … Congress.”

The growing divide is fed by a combustible mix: deep distrust among conservatives of President Barack Obama and government in general and a hardening view among mainstream Republicans that the debt-limit vote offers the best shot in years to fundamentally reorder the country’s finances — and they can’t let it pass them by. The government hit the $14.29 trillion debt limit Monday, but Treasury took steps to keep the country afloat through August.

Within weeks of Treasury Secretary Timothy Geithner’s initial plea in January for a quick vote, Republicans gravitated toward a counternarrative, pushed first by a handful of conservative economists and ushered into the mainstream by Pennsylvania Sen. Pat Toomey on the editorial pages of The Wall Street Journal.

Now, the negotiating position of a growing number of Republicans appears to be this: If they need to hold out for a better deficit-cutting deal and blow the August deadline, so be it.

“The one acting like his hair is on fire is Mr. Geithner,” said Arizona Rep. David Schweikert. “It’s absolutely silly. We have plenty of cash flow to pay debt, which means I’m trying to figure out how credibly the administration can keep using that language.”

The doubters — backed by Wall Street — reject Geithner’s repeated claims that failing to raise the statutory cap will force the federal government into the first default in its history.

That’s hogwash, the doubters say, because the government takes in more than enough revenue to cover its obligations. They acknowledge the administration will need to make deep and painful spending cuts but argue that Geithner can avert default if he prioritizes which bills to pay.

It would be more like a partial government shutdown, Toomey said.

“That’s disruptive; that’s not optimal,” Toomey conceded in an interview. “But it’s not a financial crisis. It’s not a default on our debt. It’s not a catastrophe. It’s a disruption.”

Geithner’s response? It’s default by another name.

Even if Treasury pays its debt, other obligations, such as salaries, tax refunds and contractor payments, would go unmet, tattering the country’s creditworthiness, Geithner has argued.

In a letter Friday to Sen. Michael Bennet (D-Colo.), Geithner wrote that such an event “would inflict catastrophic, far-reaching damage to our nation’s economy, significantly reducing growth and increasing unemployment.” The value of 401(k) plans and pension funds would plummet, while the cost of buying a home or car and taking out student or business loans would rise, Geithner wrote.

“This abrupt contraction would likely push us into a double-dip recession,” the secretary warned.